Excerpt from Professional Corporations – What Happens When I Die?

When you die, all your assets are deemed to be sold at fair market value; this is called a deemed disposition. The assets are not really sold; the CRA, for tax purposes, pretends they have been sold. This includes the shares of your professional corporation. They do this to prevent gains from accruing indefinitely without ever being taxed.

If you were married at the time of death or had a spouse as defined by the CRA, taxes owing at that time as a result of the deemed disposition can be deferred as long as the assets are left to your spouse. The CRA allows your spouse and the executor to defer taxes on select assets, on an asset-by-asset basis. This means they can defer taxes on certain assets and elect to trigger the gain and pay taxes on other assets.

Why would they want to pay taxes on certain assets now? Well, one reason may be the actual date of death. If you died at the beginning of the year, you might not have had any income. If your spouse elects to declare $100,000 of capital gains on your final tax return, the taxes owing would be based on only $50,000 because only half the gain is included in income. To fully understand this, let’s look at the following example…